Price Controls or Transparency?

Submitted by Scott Jaschik on June 15, 2007 - 4:00am

Shame can be a powerful motivator. And for college administrators, so can fear of paperwork, not to mention fear of the Education Department.

Provisions in the new House version of a "budget reconciliation" bill [1]-- a companion to forthcoming legislation to renew the Higher Education Act -- seize on such assumptions to tackle the issue of college costs, a favorite topic of many lawmakers. Colleges that exceed certain ceilings -- generally based on the percentage increase in costs (defined in various ways) -- would have to file certain reports with the department. The detail demanded in those reports has some college officials fearful that such a move could set the stage for significant federal intervention into setting the price of college.

The issue has received relatively little attention this week, given that Democrats and Republicans who debated the bill and approved it in committee[2] focused on demonstrating their commitment to Pell Grants and fighting over how much they could trim lender subsidies.

But these measures -- derided by some as "price controls" -- could be quite controversial if they survive the legislative process. Some lawmakers have wanted to push colleges on cost issues in this way for years. And many college officials have argued for years that these approaches involve the federal government where it doesn't belong and end up putting the wrong colleges on the lists for opprobrium. They also argue that the additional reporting requirements would increase colleges' costs.

Generally, higher education lobbyists are minimizing their public opposition to the cost-reporting requirements. They like much of what's in the House bill -- and they see the process as providing plenty of time for them to work on elements like these that they oppose. But while there isn't panic over these provisions, there is some concern -- and the presence of these provisions renews the question about whether they would be effective.

Under one provision, any college that increased its “sticker price” over any three-year period at a percentage that was more than double the basic consumer inflation rate would have to report to the Education Department explaining its increases. Other provisions would use both carrots and sticks. Institutions that increased their costs by less than the "higher education price index" (an inflation rate for higher education that doesn't currently exist in the format specified by the bill) would get more Pell Grant funds.

But another provision would apply to colleges that increase their net price (tuition and fees, minus grants) by more than the higher education price index. They would have to give the Education Department "a detailed report on the exact causes" for the increases, including details on revenues and expenditures, along with "cost containment strategies."

These sorts of requirements would be "a dramatic shift" in the federal role in higher education, said John R. Thelin, a professor of education at the University of Kentucky and author of several histories of American higher education. The focus of federal aid policy has been "on students and parents" and providing them with options, not on regulating institutions that are overseen either by states or private boards, he said.

One of the reasons the federal government hasn't gone that route, Thelin said, was that any percentage-based reporting requirement can easily punish the wrong institutions. "You can have a state university where tuition increases 35 percent, which appears to be a dramatic shift, but because the base dollar amount was low, the percentage increase is very misleading." (Some of the reporting requirements include exemptions for the lowest priced institutions, but they would leave out many institutions in such scenarios.)

And then there are issues of principle. Chris Simmons, associate vice president for federal relations at Duke University, said his institution would probably never exceed the levels that would trigger additional reporting requirements. But for those that faced that risk, he said, "it's going to set up all kinds of gaming" as colleges try to avoid the percentages that would get them in trouble.

More important, he said, is the question of federal monitoring of a free market. "If we are charging too much, or not providing a good product, people will stop coming here," Simmons said. Instead, institutions like Duke have more applicants today than a generation ago. And the reality, he said, is that Duke attracts high percentages of low-income students -- who receive grants from the university and graduate at very high levels.

So if a university attracts far more applicants than it can admit, uses millions of its own money to admit and enroll low-income students, and these students report great satisfaction with their experiences, why is the federal government creating new reporting requirements? he asked. "It's not the federal role."

Susan K. Hattan, a senior consultant at the National Association of Independent Colleges and Universities, said that the reporting requirements linked to the higher education price index are of particular concern. She said that basic reporting of costs didn't bother her association, but requiring private colleges to turn over detailed revenue and cost reports to the Education Department did.

"This goes well beyond disclosure," she said. "This crosses a line into a situation in which the federal government will be controlling tuition rates."

The actual legislation doesn't specify what the department would do with the data it collects from colleges. But with the Education Department, many colleges take an "anything you say can and will be used against you" approach. Hattan said, "you would be sending your strategy to the secretary. Is she going to put it on a shelf?"

There are also all kinds of practical questions about these approaches.

Sandy Baum, a Skidmore College economist and senior policy analyst at the College Board, said that these requirements might motivate "a few institutions on the line" to better control their costs and restrict their tuition increases, but they wouldn't have a major impact on what most colleges charge or the availability of aid. To the extent that some institutions are identified as increasing charges or net costs by more than Congress considers appropriate, the institutions likely to turn up on the list aren't those that have many options, she said.

"You are going to see those in financial difficulty and those with low tuition to start with," she said. "It's going to be an arbitrary list."

And even percentages can mean very different things from year to year, she said. Exceeding twice the rate of inflation might seem irresponsible if inflation is 10 percent, but what if it's 1 or 2 percent? Baum asked. "Rules like these have all kinds of unintended consequences."

William E. Troutt, president of Rhodes College, was chair of a Congressionally created panel on college costs a decade ago. He said that it is important to distinguish between disclosure and bureaucracy. Providing more information to students and their families about how much it actually costs to attend a college (including not just sticker price, but aid from various sources) makes a lot of sense, Troutt said. So does collecting information about rates of increase. Colleges should be open to moves to make this data more available and easier to understand, he said.

But Congress should remember that when it tells colleges to file more reports, that costs money, too. Some of the proposals currently in play "sound like more regulation," he said. "A driver of costs is in fact federal regulatory compliance."

Despite the concerns voiced by many, higher education lobbyists are taking a low key approach on these provisions. Terry W. Hartle, senior vice president for government and public affairs at the American Council on Education, noted that the bill was put together quickly, and that lawmakers assured college officials that they would be open to talking about issues raised by various provisions.

"What we have is a work in progress and no one has had a chance to analyze it fully," Hartle said. He agrees with many of the criticisms being raised about the reporting provisions on college costs. "If more federal regulation and reporting requirements reduced prices, Americans would have the cheapest health care system in the world," he said.

But the thing to remember, Hartle added, is that this legislation "has got a long way to go."

In addition, provisions to authorize significant increases in Pell Grants could help many people pay for college. "There are many good student benefits in the legislation, and we do not want to reflexively do anything that would appear to be undermining those benefits."

From a very different perspective, Richard Vedder is also weighing the benefits and costs of the bill. An economics professor at Ohio University, Vedder was a member of the Secretary of Education's Commission on the Future of Higher Education,[3] and he regularly accuses colleges of ignoring issues of expense, and letting their costs run up. So the idea of doing anything to pressure college costs has appeal, but Vedder's dilemma is that he's normally an advocate for a minimal federal role in higher education.

Vedder said that since he accepts that the federal government isn't going to disentangle itself from higher education and that colleges won't take costs seriously enough (for him, at least), he favors the reporting requirements. "Colleges and universities aren't sensitive to costs, certainly not like the private [business] sector," he said. "And a lot of the tuition money has gone to administrative costs or for higher salaries for faculty and non-faculty."

If Congress wants to expand student aid, Vedder said, it's only responsible to get college to report more on why they charge what they do, in the hope of getting more of them to find ways to cut costs.

"Universities need to be forced to be more sensitive to costs," he said. "If you are going to drop money out of airplanes over universities -- or you are going to give money to go students, an indirect version of the same thing, it behooves a university to meet certain standards."